Interview with Garry Walsh, CEO of Mezzan Holding

Please describe the evolution of the food manufacturing and food services industry in Kuwait. What are the main trends and how do you fit in?

Over the last ten years, there has been a big drive in Kuwait to consume food out of home. People have moved from the traditional nuclear family, or the Kuwaiti version, and eating in the house to eating out of the home. That has actually changed in the last year. The economic situation has become tighter, so people are much more likely to consume food in the home. This has been a big change in the demographic. Throughout Kuwait, restaurants that before would have managed to rebadge and keep going are now closing. Now, there is real pressure on them. We fit into this situation because obviously, our strength is in people's homes. We supply the number two water in Kuwait, the number one chips in Kuwait through KITCO, and the number one meat in Kuwait through Khazan. For a company like us, it helps, and hopefully will continue to help for the next couple of years.

How do you evaluate your decision to go public two years ago?

The shareholders, who are the important people, would say that it has been the right decision for them. It has made it much easier for them to act as a Board and to see the company as an investment, rather than something to which they are emotionally tied. They have been very good at acting as a Board and taking decisions in conjunction with the independent directors in a way that is appropriate for the business. From a management perspective, it imposes different disciplines on us, which is good. It forces us to think much more deeply about things because we must go through all the various committees you would expect a listed company to have. When I have done my thinking well and everything goes smoothly through the committees, it is a great idea. When I want to get things done quicker and I have to slow down and go through the committees, it is more difficult. But that is what you would expect. A family company generally makes decisions much more spontaneously, whereas a listed company has to be much more methodical in how we approach things. It has helped us as well as a management team in that it has made it easier to say no. One of the important things for us in strategy is not just to say what we will do, but to be clear on what we will not do. We have a mandate from the Board to progress in certain directions. If something comes up that is not in those directions, instead of wasting time evaluating and going through it, we are able to simply decline. It does not matter how good a property deal I am offered is or how good an investment opportunity is. That is not our business, so we can say no and move on very quickly. Overall, it has been very positive.

We have just bought into an acquisition in Saudi Arabia last year. If the right opportunity came up in Oman or Bahrain, we would buy there. We see ourselves as a GCC wide group.

How did Mezzan Holding perform last year? Which of the divisions experienced the most growth?

Our strength is in food manufacturing and distribution. We are very focused on our own brands and on our third-party partners. That business continued to perform extremely well for us. In a scenario where most of our competitors were in decline, we continued to grow. Our industry peers and many of the food companies in the region had their business collapse in the fourth quarter. Last year, our business experienced 14 percent growth. We did very well in our core areas. In our less core areas, such as our catering business, we won some new contracts. Our turnover looks very good, but we are struggling with profitability as we bring those contracts up to scale. Our services business is our business with the UN. We describe it as food, but in more difficult environments. It continues to perform extremely well. Our FMCG business did well, also. In terms of industrial business, we started our new lube oil refinery and it performed well up until the end of last year. It has started the new year very strongly. Overall, we are very happy with where we are.

With regards to catering services, is there a specific segment you are serving to, such as oil and gas?

The services segment is very esoteric. We have a food and vegetable business and a bakery in Afghanistan. In Zaatari, Jordan and in Erbil, we have stores which we run in a partnership with the UN. The rations getting pushed out of the planes that were all over the papers last year were packed by us. For us, it is food, but in a different environment. In catering, we have a very strong business here and in Qatar, and it is very well diversified between government organizations and non-governmental organizations. In Qatar, with the construction that is going to come in between now and the World Cup, we believe that the catering business will continue to be very strong for us. In Kuwait, the government has started spending on new refineries and we are picking up our share of the labor camps for those buildings. We think that business will do very well over the coming years.

Your presence in Jordan experienced over a 40 percent growth, which is a huge number, because of this food supply.

Much of what we do in the services business we do in a very challenged environment. For example, our food and vegetable operation in Afghanistan was started in order to supply NATO. Now, we are supplying several embassies. As you build trust with people and show them that you can give them the same quality at a reasonable price, then you start to build more business. It has been the same with the UN. As we have worked with them more and more, they have approached us about working with them more and more. The team there does a very good job in terms of something we try to do across Mezzan, which is to do what we say we will do. For the UN, that is very important. If there are 25,000 refugees stuck between the border of Syria and Jordan and you say you will get food there, you must deliver that food because there is no Plan B. So, that business has grown as we have continued to deliver for people.

Are you planning on expanding into new countries and new markets?

No, we are happy with what we have. We are in seven countries. We have just bought into an acquisition in Saudi Arabia last year. If the right opportunity came up in Oman or Bahrain, we would buy there. We see ourselves as a GCC wide group. Outside the GCC, the things we have gone into, such as in Afghanistan and Jordan, have worked well for us, but they have been very opportunistic. Our focus is on building our food manufacturing and distribution footprint in the GCC. Our debt is extremely low, so we have the capacity to make further acquisitions if we wish. We are geographically stable for the time being.

Are you planning to introduce new products, services, or lines of business?

We will spend approximately 100 million dollars on new capital expenditures this year, including new machinery and new buildings. We are constantly looking at new products, new facilities, and new opportunities. For us and for any food company, innovation is the key to continued success.

In your core business of food manufacturing and distribution in the GCC and Kuwait, what is the key to your success?

We are effectively exposed to the consumer. For us, the key to success is understanding what the consumer wants and delivering that at the best possible value while still making money. For example, we are number one in Kuwait in rice. Rice is a very stable product in this economy and it is very much a part of the everyday consumption of nearly everybody. We offer a variety of rice. We have a very premium Indian rice which is ultra-pure and non-GM. You or I would not notice the difference, but to someone who is in rice, it is like a fine wine. At the other end of the spectrum, we have a brand which is more for everyday consumption. We are focused on identifying the consumers at each category and being able to make sure that we are able to service them through the offerings that we have.

What are the challenges you face in this industry?

Every other government in the region has imposed significant cuts on their citizens. In Kuwait, that has not happened, but people are talking themselves into a recession. There is no reason for their behavior to change. Their salaries have not gone down, they still take the same subsidies from the government, they still receive housing, all of that is still the same. But people are talking themselves into needing to be more conservative and saving money and that has driven huge changes in consumer consumption in Kuwait. For example, new car sales are plummeting. Companies like Mercedes and Porsche are down 25 to 40 percent in new car sales, which is unheard of in Kuwait. Likewise, in the food industry, there is a shift from out of home to in home. Even within home, we have seen much more of a shift towards focusing on good value. People are not interested anymore in buying a product because they always bought it in the past. There is much more consideration going into purchases. People who are into fresh products, like milk, have seen a slight decline because people are making sure it does not go out of date, whereas before they did not care. The challenge for our company is always to cope with the changing consumer dynamics. Sometime next year, Kuwait will introduce VAT. That will drive a fundamental shift in the pricing of nearly every single product in Kuwait, which will have a massive impact on consumer behavior. If car sales are already down, and the price increases by five percent or an even higher percent, that is going to make a big difference. For the technicalities of trapping the VAT, calculating, and having the computer systems, the team here will do a great job and deliver that. It is the consumer behavior that we worry about.

What is your relation as a company with B2B?

We argue with our sales department repeatedly that it is only a sale when we actually collect the money. A point of action does not mean anything. What we see with B2B everywhere in Kuwait is much more stress on collections. We have done a good job over the last few years in bringing our collections down from 180 days to about 100 days. There is much more for us to do. But if you take the same team, who have been able to achieve that quite consistently over the years, and now they are struggling for two, three, or five more days down, that shows that now there is a lot of resistance to paying people. This is because many companies do not have money. As we look forward, in concern to companies who were operating but not making a lot of money, who were losing money, or the owner had a significant property portfolio and said it was not an issue, many of those businesses will fold over the coming two or three years, which will give opportunities for us. You do not go after the big company in a market, you go after all the small companies and then you are left with two or three big companies. If those small companies fold, that suits a business like us. It is unfortunate, but we need to make sure that we are not exposed from a cash perspective when that happens. It is a big challenge in dealing with B2B, at the moment. Another challenge with B2B is that desperate people make desperate decisions. We are seeing a lot more business moving around. It is important that we are very keen on our pricing now because if a company thinks that if they do not get this deal they will go out of business, they will price that deal much more competitively than they might have six months or a year ago. We are certainly seeing that emerge in every sector. In food manufacturing distribution, we supply Subway Sandwiches with their meat from our factory in Sharjah. If Subway says demand is going down but they need to deliver more profits, they can cut some of their staff's benefits. But the biggest thing they can go after is their suppliers. The meat factories say demand has gone down, but if they can get more in they can get economies of scale and keep going. We saw our biggest competitors in meat in the UAE fold six months ago. Typically, when that happens, we would expect margins to expand. We have seen our business grow, but we have not seen our margins expand. This is because of the competitiveness of businesses coming from Jordan or Saudi Arabia. Everyone is trying to scramble after the same business. So, it has made a huge difference.

Where do you see Mezzan Holding in the medium term of two to three years' time?

Our chairman would say that we have doubled the business over the last five or six years, and it would be nice to do that again. I agree that it would be nice. What we would all agree on is that if you look at five years ago, 98 percent of our profits came in Kuwait. Last year, it was 65 percent. We would like to get to 50/50 very quickly. The acquisition in Saudi Arabia was a huge platform for growth for us. There are 32 million people there and we are a food company and we need mouths to feed. We would like to see the company continue to grow at around 10 percent every year, either naturally or through acquisitions, for the foreseeable future. As a team, we can do that. This year or next year, because of the changes being driven by the governments in the different markets, we will have to be very flexible. For example, Saudi Arabia is talking about increasing import tariffs from 5 percent to 25 percent. They have passed the legislation, but have not announced an effective date. Here in Kuwait, the electricity is going up fivefold. We must be ready to cope with that when it happens. But our top line growth will come. We must continue to make sure we are very focused on drilling the best out of that from the bottom line.

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